Eyeing reverse flow from Brussels

CILLIAN O’Donoghue is a Brussels-based energy analyst with the public affairs firm Fleischman-Hillard. He is an expert in central European energy security and previously worked for the European Commission Directorate-General for Energy with a focus on the Southern Gas Corridor and Trans-Caspian Pipeline negotiations. He spoke with The Slovak Spectator about the April 28 agreement that paved the way for the reverse flow of natural gas from Slovakia east into Ukraine.

CILLIAN O’Donoghue is a Brussels-based energy analyst with the public affairs firm Fleischman-Hillard. He is an expert in central European energy security and previously worked for the European Commission Directorate-General for Energy with a focus on the Southern Gas Corridor and Trans-Caspian Pipeline negotiations. He spoke with The Slovak Spectator about the April 28 agreement that paved the way for the reverse flow of natural gas from Slovakia east into Ukraine.

The Slovak Spectator (TSS): Are you surprised by the choice of the smaller pipeline option?Cillian O’Donoghue (CO): I am not surprised. There was something of a growing realisation by the Ukrainians that they would have to compromise. The proposal on the table from the Slovaks was the best option. The Ukrainians came with the idea to use the four larger pipelines. From the Slovak side that wasn’t an interesting offer. Ukraine was not prepared to give up on their idea during the first round of talks. For the Slovaks it came down to both the technical and economic sides of it. The unused pipeline seemed to make sense. It’s the exporter that makes decisions like this. Then the buyer decides if they want it. The buyer doesn’t tell you what to do.

TSS: Slovakia recently renegotiated its own gas prices with Gazprom. How were the restrictions that are part of that contract a factor in the negotiations with Ukraine?CO: It was definitely a factor, but it’s very hard to precisely quantify something like that. There is no denying it exists. Everything took place amid that broader context.

TSS: How big a deal is this agreement? Will it make a major difference for Ukraine?CO: At the political level, it’s important. [European Commission President José Manuel] Barroso was there in person. That sort of sends the message “We are here for you” to Ukraine. On the technical level, everybody is aware of its limitations. It will not be that much gas.

TSS: There was a lot of pressure from Brussels and Washington to get some deal done. How much do countries in western Europe actually contribute to something like this?CO: People talk about solidarity. Solidarity can be a codeword for free loading. Energy security costs money. The Czechs spent money on pipelines. The Polish are prepared to pay a premium for importing liquefied natural gas from Qatar. You can really see a divide in Europe. The Hungarian foreign minister was in Brussels recently. He was speaking on sanctions for Russia. For somewhere like the Netherlands tougher sanctions are a question of some money. For Hungary or Slovakia it’s a question of survival. It’s certainly not in their interests to impose stiff sanctions - they are going to bear the brunt of it.

TSS: How final is this agreement on the pipeline? There are still quite a few details missing, yes?CO: It’s a preliminary agreement. These things happen often. It lays a framework for the next move. It’s a political statement. It is down to the companies and the commercial fields to solve the specifics. This is only the beginning.

TSS: Where is the gas that will fill this pipeline coming from?CO: This isn’t finalised. Not at present.

TSS: Everybody is talking about this pipeline being operational in October. Is that realistic?CO: It seems ambitious and I am doubtful. Still, this is something small. It’s not nearly enough to cope if Russia shuts off the tap in the winter. I don’t think there will be a shutoff, but still, the real timelines don’t seem to add up.

TSS: You say you don’t think Russia will shut off the gas flow to Ukraine. Why not?CO: The first thing is that it’s a relationship of interdependence. Gas passes through Ukraine to Europe. The Russians need our money, we need their gas. Gas is one of many competing fuels. Gas can be displaced by something else. It is in competition against coal, renewables and so on. It would have bad PR ramifications for gas. You have to look at it in this context. Russia would be seen as an unreliable supplier. There was a shut off in 2009, but the Ukrainians weren’t paying for the gas.

TSS: Gazprom is also saying they may make Ukraine begin paying for gas in advance. Do you think this will happen?CO: Maybe, yes. In January, Ukraine paid for half the gas they used. In February and March they paid nothing. It’s natural for a company to expect payment for their product. They are delivering gas to Ukraine and they haven’t been paid in two and a half months. The other issue is the price [which has nearly doubled in recent months]. I see the negotiation as a kind of grand agreement on price and payment method. You work on both elements to reach a final deal. There are trilateral talks at the working level. The European Commission is involved.

TSS: Does Ukraine have any real option other than Russian gas?CO: You need to separate into the short, medium and long term. Short term they do not, no. It will be two to three years at best. They don’t have the infrastructure to replace that amount of gas quickly. There is so much work to do and the timelines don’t match. That is why energy security is called energy security.

TSS: How much do you see Gazprom as a politically motivated entity?CO: In the European market, they are a company that wants to maximise profit. This is the normal behaviour of a company with a disproportionate, almost monopolist share. It’s monopolistic behaviour by an economic entity. Sometimes this can be construed as political motivation.

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